Machhapuchchhre Bank
Exploring New Heights
Machhapuchchhre Bank started operations some seven years ago from its head office in Pokhara naming itself after the mountain peak that has become the symbol of Pokhara. But the real growth in the bank’s operations started after it entered the Kathmandu market through its corporate office in the capital city in 2061 BS (i.e. two years ago). While the bank incurred losses in the first two years of operations, the growth rate in the bank’s net profit in the year after its operations started in Kathmandu was a hefty 158 per cent, an achievement that puts it in the front row of banks in the same generation.
This proves the belief that businesses are concentrated in the capital, which has been driving the penchant among all the banking and financial service providers to have their presence in Kathmandu . But Machhapuchchhre Bank is however still trying to expand in the markets outside the capital and in the remote areas. “This is because, we firmly believe that there are a lot of potentials to be tapped in the rural areas,” says Bhai Kajee Shrestha, CEO of Machhapuchchhre Bank and a former central banker.
In fact, Machhapuchchhre Bank had started lending to rural people some years ago with small loans to the villagers in the Begnas Lake area near Pokhara. The repayment was good until the sixth monthly instalment, recalls Shrestha. As the conflict in the rural areas intensified, the bank employees who went to collect repayments there were advised by the borrowers to stop coming. Therefore, the bank stopped providing small loans to the villagers directly and started fulfilling the obligation of lending to the deprived sector through the Rural Development Banks – a practice followed by most commercial banks.
However, another experiment in similar group lending has so far been successful in Pame, according to Shrestha. “Therefore, as the conflict seems to be over now, we are thinking of starting such micro-lending on our own again,” he says.
Machhapuchchhre Bank was registered in 2054 BS by promoters who were mostly from Pokhara but its operations started only in 2057 BS – one year before Shrestha joined the bank as its CEO. The reason for the delay was more in an emotional factor than in the business sense. “They wanted their bank to start operations from its own building rather than from a rented premise,” Shrestha recalls.
The same emotional aspect partly explains the reason why Machhapuchchhre Bank became the first private sector commercial bank to provide modern banking services by opening a branch in Jomsom, a very remote area (though the bank management also saw the prospect for good business there, i.e. tourism, which would give the bank a foreign exchange business). The bank also installed an ATM machin e in Jomsom to facilitate 24 hour banking to the local people as well as tourists, which the people have appreciated. Therefore, the bank is now planning to install more ATMs in similar tourist destinations in the future. Shrestha also informs that the bank is going to open more rural branches in the near future – one in Baglung and a couple of others in eastern Nepal .
But this rural focus of the bank is driven not only from emotional factors or immediate business prospects. The idea is to be competitive enough by the time the Nepali market is opened to foreign banks in 2010 CE, in accordance with the terms that Nepal agreed to while becoming a WTO member. Shrestha reasons that foreign banks will be interested in large lendings (wholesale banking), where their strengths lie. They will not be enthusiastic about retail banking or in providing banking services to the rural areas where loan sizes are small. “Since this is going to be the niche market for Nepali banks, we have to start preparing the base in this area right now so that we will continue doing good business even with the foreign banks operating in our country,” he adds.
One special feature of the Machhapuchchhre Bank is its focus on technology which has made it the first bank to offer the ‘Anywhere Banking’ facility right from the beginning of its operation. Its Globus banking software has helped it expand the ATM service in remote areas like Jomsom (though in this case the bank took the help of SCT Network). And now the branch expansion planned in other remote areas is based on the same platform. The software also helped the bank in offering the SMS alert service immediately after it entered the Kathmandu market. This made the bank match the same services being offered by other banks in Kathmandu.
The drive to expand its ATM network in the capital has also been such that it grabbed the permission to install an ATM alongside Nepal Rastra Bank’s gates in Kathmandu (both in Baluwatar and Thapathali) and manage the salaries of NRB employees. The Thapathali ATM kiosk is designed in such a way that even the physically disabled can use it. Nearby the Thapathali ATM kiosk, the bank is constructing its Kathmandu office building. It also has the permission to install another ATM alongside the gate of NRB’s Bhairahawa office. Some other ATMs are planned to be installed in the periphery of other government offices as well, including Singhdurbar. Under this plan, it has recently signed contracts with the Commission for the Investigation of Abuse of Authority (CIAA) and Nepal Television to manage their employees’ salaries.
At present, the bank has 12 branches scattered over the remote mountainous area of Jomsom, Kathmandu and Bhairahawa and Birgunj in the Terai.
Started with the paid up capital of Rs. 86 million, the bank had to increase it to Rs. 550 million by issuing additional shares so as to meet the requirements set by the central bank to start operations in Kathmandu. Though the additional shares issued was oversubscribed only four times, this amount was not small because it happened in spite of the sluggish capital market of that period and the bank reporting continuous losses in the previous two years of its operations. “The bank’s net worth per share was only Rs. 95 against the paid up value of Rs. 100 but we did not hide this fact and clearly mentioned it in our prospectus,” says Shrestha. But once the shares were enlisted in the stock exchange, they gained value at a fast pace. For example, while the bank’s shares were selling at around Rs. 320 per share in July this year, they are now selling at around Rs. 465, as of mid-December.
Though the bank hit the jackpot in Kathmandu, its business has not really picked up in Pokhara. This is because there is not much of a business there except in tourism, explains Shrestha. Although there is a lot of remittance money flowing into Pokhara from the Gurkha soldiers, most of it is used to build big houses and to buy cars. “The problem is that people are not investing in productive assets. Decades ago, some ex-Gurkha soldiers opened a cinema hall and started a bus service but they were not successful. That may be the reason that they are not very interested in investing in productive businesses,” says Shrestha. However, he is hopeful that new ideas will be generated after the seminar being held in Pokhara by the young entrepreneurs’ association in mid-December concludes.
Another interesting feature of Machhapuchchhre Bank is that it has not increased the interest rate in saving deposits for the last three years. However, the share of the saving deposits in the total deposit mix has increased to 33 per cent now from only about 8 per cent a few years ago. This was the result of some innovative strategies, says Shrestha. One of the bank’s main strategies is to offer only two types of savings accounts. The first is called ‘Normal’ savings and the second is called ‘Royale’ savings. The interest in Royale savings is calculated daily and for normal savings, it is calculated only at month-end.
To attract deposits in the Normal saving accounts, the bank reduced its minimum balance from Rs. 5,000 to Rs. 1,000. “We knew we were operating in a relatively rural area and requiring Rs. 5,000 as the minimum deposit did not make sense. When we reduced this requirement, the result was amazing,” says Shrestha. But even more amazing is the story about the Royale savings, which gained enormous success in a short span of time after the change in the facilities offered to the depositors under it. Previously, the depositors in Royale saving account were provided medical insurance. But it was felt to be costly. Moreover, the clients were found to be mostly unaware about insurance so they could not benefit from this scheme. Therefore, the bank started offering gold as monthly lucky prizes to five depositors, sensing that gold would be more attractive to their target audience - the prospective depositors. And that idea clicked. Within six months, Machhapuchchhre Bank became the number two in Pokhara in terms of deposits. Currently, the scheme is modified further to provide gold coins to four more people every month.
For investment, Machhapuchchhre Bank is also focusing on hydropower as one of its core areas. They have given loans to nine hydropower projects so far, of which, three are already in operation and another two are scheduled to go on stream in January.
But given the importance of remittances to the Nepali economy, it is surprising that it has not appeared in Machhapuchchhre Bank’s radar screen so far. Shrestha’s personal view is that commercial banks should not be involved in remittances because it is not an area of their core competency. “Of course remittances have to come through the banking channel but non-banking sector entities should be given the responsibility of handling the remittance,” says Shrestha. In this context, he gives the example of Shikhar Vaidya, who has opened a remittance agency in Qatar and who sends money to beneficiaries in Nepal through Machhapuchchhre Bank. The bank nonetheless does encourage people who go abroad to open accounts in the bank so that they can send money to Nepal through it. And even if the bank has not focused exclusively in this field, the remittance business of the bank is on an average $300,000 every day.
As per NRB regulations, a bank should have a paid up capital of Rs. 1 billion by the end of the fiscal year 2065/66. To achieve this, the bank is planning to issue 15 per cent bonus share after getting this approval in the coming AGM. This will increase the paid up capital of the bank to over Rs. 820 million. And the bank already has Rs. 35 million in its capital reserves. “The task is to get the remaining 140 million which we will surely manage in three years,” says Shrestha.
Bluebird Mall
Brand Bazaar
The Bluebird Department Store has now expanded into the Bluebird Mall, making it the ultimate destination for those who are obsessed with buying only genuinely branded products.
Occupying all of what once was the Bluestar Hotel, a four star property at Tripureswore, the Bluebird Mall has a shopping area spread across 60,000 sq. ft. and it can now be called the Brand Bazaar. Fifty of its outlets are exclusively for particular brands, famous internationally or within the country. Binod Tuladhar, the Managing Director of the Mall, says the premises will offer only genuine products under each brand. "The shoppers who come to us will no longer have to worry about the possibility of paying a hefty sum and being handed out a counterfeit product," he says.
Though the Bluebird Mall may not fall under the strict international definition of a Mall, this surely is different and very large compared to other big retail outlets in the country.
One major difference is the fact that though each shop is owned by individual shopkeepers, there is no boundary separating one shop from another. Shoppers pick up the goods from the shops they like and pay at the central cash collection counter. The range of items available is also much wider than in other existing large format stores as the mall sells not only daily necessities, garments, personal care products and electronic goods, but also jewellery and furniture.
The other difference is the fact that the Bluebird Mall has not only a food court and a beauty parlour but also a cyber café. The food court offers a wide variety of cuisines from such well known restaurant outlets like Bawarchi (Indian food), Tamarind (vegetarian Indian), Hot Bread (fast food) Café de Patan (Newari food), Hunan (Chinese food), Roadhouse Café (coffee and beverage) and Royal Thai Restaurant. All these food and beverage outlets have their own separate kitchens but the seating facility is common and the payments are collected against coupons at the central cash collection counter. Apart from the 200-person seating area for the food court, there are four separate halls for birthday parties, seminars, exhibitions and product launches as well.
Most importantly, the mall has extended its parking lot so that it can accommodate 80 cars and 50 motorbikes at a time - something that definitely puts it ahead of other stores in the capital.
However, Bluebird is still not fully a mall by international standards, which requires facilities such as cinema halls. Tuladhar says this is because of the space constraint. "We are thinking of opening a full-fledged mall if the required space is available somewhere," says Tuladhar. His indication is towards a hypermarket which is usually on the outskirts of the city.
Since December is a month of festivals, the mall is organising a series of events starting from the 14th - 31st of December 2006 with the theme Season of Bells. Events such as food festivals, fashion shows, shopping with celebrities, face painting, free mehendi, astrology, auctions, lucky draws, wine tasting and carol singing on Christmas Eve will be organised.
The inspiration is the increasing number of visitors in the Bluebird Mall which has already reached as high as 400 on weekdays and higher during the weekends. So Tuladhar is not worried about the competition though another big shopping centre is coming up in the near future in Tripureswore. "First it is still not clear as to what would be the format of the new shopping complex. However, we think this new facility will establish the Tripureswore area as the new shopping centre of the city and that would be an added help for Bluebird Mall," he declares.
Dancing Elephant
When Louis Gerstner successfully rescued the sinking IBM Company, he wrote a book —Who Says Elephants Can’t Dance? A similar story seems to be unfolding in Nepal Bank Ltd. though the comparison may be somewhat misplaced due to the difference in the business and size of the two entities. However, the point is, the unwieldy Nepal Bank that was trundling under the heavy weight of an enormous 62 per cent non-performing loans and 5,600 plus employees has turned into a graceful ballet dancer now. This happened after the radical changes brought about in four years time by the management of a team led by ICC-MT of Bank of Scotland ( Ireland ).
The most important factor to gauge this change is the difference in the stance taken by the Central Bank’s officers about the ICC-MT. Till last year, they would not let any chance slip away to highlight their perception that the international management (thrust on them, as they would say, by World Bank and IMF) had failed. They accused that it was not able to slash down the ratio of non-performing assets (NPA) and computerise the bank’s branches as per the management contract plan. But at a function held on November 16 to mark the completion of 69 years of the bank, the central bank bosses were full of praise for the same management. Deputy Governor Krishna Bahadur Manandhar of Nepal Rastra Bank said, “This is a success that has to be sustained by the Nepali management (that will take over the bank in the future).” ICC-MT officials claim that NBL is now nearly ready for privatisation.
Started in 1938, NBL functioned as the virtual central bank for about 19 years till Nepal Rastra Bank was established. It got a competitor in 1965 when the government set up the Rastriya Banijya Bank (RBB) as the second commercial bank of the country although 49 per cent ownership of the government in NBL ensured that the two entities co-operated rather than competed. And the result was perverse. Both banks were suffering losses though the management was able to report profits by window-dressing the accounts. Although there were some noises about this even in the Panchayat era and efforts such as CBPASS were made to revive the slumping elephants around, the problem went on snowballing and really came to the fore after the restoration of democracy in 1990. Although the post-1990 government diluted its majority shareholding in NBL by selling shares to the public, the entry of the private sector in the NBL Board did not prove helpful. A report of an independent audit brought out in 2000 confirmed that NBL (together with RBB) was technically insolvent. Then there was an international management team (with some Nepali professionals in) brought to manage NBL.
When the international management took over in 2002, the bank had incurred a loss of Rs. 8 billion over the previous three years, according to Parsuram Kunwar Chhetri, the Head, Bank Administration of NBL and a Nepali member of the international management team led by ICC-MT. But during the last four years, the bank made a profit of Rs. 3.54 billion, according to Chhetri who also says that the bank’s bad debts have decreased to 16 per cent as of mid-July 2006 from 62 per cent in 2002. The unaudited report for the quarter ending in mid-October 2006 puts the NPA at 15.26 per cent. Though 20 percentage points of the reduction in the bad debt is due to write offs in the financial reports, the rest of the reduction is from cash realisation. “During this period, we realised about Rs. 7.5 billion in cash out of the bad debt,” says Chhetri adding, the ratio of good loans in the total loan increased by 20 per cent in the last fiscal year alone. “The percentage of bad loans would have been much lower if some big defaulters had not got stay orders from the courts,” he points out. Loans for which the courts have issued stay orders account for about 22 per cent of the total bad loans, he informs.
But the problems of the international management team were more than just the stay orders. When the ICC-MT signed the contract, which had high targets for loan recovery, the government had promised that there would be an asset management company (AMC) and a Loan Recovery Tribunal already set up by the time the ICC-MT took over the bank’s management. But the Tribunal was set up much later than the targeted date. The AMC, which would be specialised in realising bad loans and managing the assets has not been set up as yet. The Tribunal has proved very helpful, though it is still not functioning in full swing as it is not provided with the necessary infrastructure and manpower. “We realised Rs. 100 million from those borrowers who came to us for out of court settlement after we filed cases against them in the Tribunal,” informs Chhetri. Currently 71 per cent of the bank’s bad loan is with 136 borrowers who have not paid a single paisa during the last four years. Only 23 borrowers account for 50 per cent of the bad loan.
Costs
The ICC-MT is accused of showing profits by including the Rs. 1.96 billion realised by selling shares that NBL had held in the Standard Chartered Bank Nepal Ltd. Clarifying this, Chhetri says that this ‘extraordinary earning’ is more than off-set by the ‘extraordinary expenses’. Rs. 3. 29 billion was incurred in sending the redundant employees into retirement under the Voluntary Retirement Scheme and providing for the obligations (like gratuity) created in the past. The bank has made operating profit of around Rs. 3 billion in the last three years (without calculating the extraordinary income and expenses).
ICC-MT is also accused that all this achievement was at a very high cost. Critics say that the cost of this reform is as high as Rs. 7 billion which has been provided by the donors as loan to the Nepal government. But Chhetri says that amount is for the entire financial sector reforms and some of it is for the RBB and some for Nepal Rastra bank. The NBL has got only Rs. 500 million out of that amount till mid-July 2006 for management expenses. Another Rs. 1.6 billion received as loan from the World Bank for employee retrenchment has not been spent as yet and this amount is being invested in foreign bonds, thus earning interest income, he informs.
Another achievement in the NBL is the conversion of ‘high cost’ fixed deposits to ‘low cost’ saving and current account deposits. According to Chhetri, the money that was unused in its branches has been mobilised in income generating areas and that is about Rs. 12 billion invested in government securities alone.
Other Reforms
The reforms in NBL are not limited in the balance sheet figures of profit and bad loans percentage. The main problem in NBL was with the employees. Most employees lacked the right attitude to work. They treated the bank job as government jagir, where they got paid without working. Similarly, most employees lacked the skills required in their jobs. The new management, therefore, focused on training. During the four years, the new management provided trainings to about 6,000 employees (including repeat trainings) on modern banking skills.
As a result, employees have become more professional and the tendency of all the employees to go home after 3 pm is over. People are seen to be working till 8 pm to finish their tasks, claims Chettri. In the past, loan proposals-even for big projects used to be just a single page long and were passed without much scrutiny. “But now, these proposals run to as much as 30 pages, analysing all the relevant aspects of the projects,” says Chhetri. Also the practice to monitor the loan utilisation is more detailed. If borrowers fail to meet the repayment schedule or if there is any other discrepancy noticed in the account’s performance, actions are initiated in time to make the necessary rectification. And the bank now regularly submits financial reports to the Central Bank whereas the previous management would never do this.
Profit of NBL (Rs. in million)
Fiscal Year |
Profit |
| 2003-04 |
710 |
| 2004-05 |
1730 |
| 2005-06* |
1350 |
| 2006-07** |
157 |
* Unaudited
** Unaudited, first quarter
|
|
During the last four years, Nepal Bank has drastically reduced the number of employees through voluntary retirement schemes. The bank, which had started with 12 employees, had 9,000 employees in its payroll at one point in time. When the new management took over, this figure was 5,652. Now the number has been reduced to just half, i.e. 2,960. However, there are 267 newly recruited employees and IT graduates as well to balance the age range and skills required by the bank. Sixty-nine employees were sacked on the charge of corrupt behaviour during the four years of ICC-MT’s management.
Computerisation
One major point raised to criticise the ICC-MT is its failure to computerise the bank as planned. Chhetri accepts the criticism but says the delay was due to the fact that the employees were without computer skills required in the bank. “Providing computers to employees who lacked the required skills was going to be useless. Therefore, we focused more on providing computer trainings.” But now, the first phase of computerisation is underway and 44 branches of the bank have already been linked in a network. These branches account for about 85 per cent of NBL’s loans and 75 per cent of the deposits. In the second phase, 38 more branches will be computerised and brought into this network. That will cover 97 per cent of loans and 92 per cent of deposits. “Any Branch Banking” is planned to be available soon in the 44 branches which are already computerised. ATM’s and credit cards will also be started in the near future, Chhetri informs.
However, despite all these successes, the bank has not been able to wipe out the accumulated losses that amount to Rs. 6.6 billion as of mid-July 2006. The net worth of the bank is still negative at about Rs. 6.2 billion. The biggest challenge for the bank at the moment is to bring this figure to the positive side. Chettri says that the bank has already submitted a ‘capital plan’ to the Central Bank to rectify this situation. This plan contains many alternative schemes and Chettri predicts that the implementation of the capital plan and the privatisation of Nepal Bank will go hand in hand.
